Sandbagging

Sandbagging refers to the process wherein professionals pretend to have lower abilities to achieve their business goals. However, they are well aware of being capable of accomplishing a way better mark in reality. Therefore, when they showcase a lower capability, top management has lower expectations, which the former know could easily be fulfilled.

Through sandbagging, to be more precise, executives and managers play safe as the expectations of the shareholders and investors are low, and target accomplishment is easier for them. As a result, when the managers record higher-than-expected results, they remain in the good books of the higher authorities.

• Sandbagging is a strategy that businesses use to showcase their fake lower capabilities to shareholders/investors so that the latter's expectations remain limited.
• When sandbagging companies, managers, or executives perform better than the expectations of their higher authorities, it helps them build their goodwill.
• Though the process seems effective in lowering the authorities' expectations, it tends to become ineffective gradually.
• Some of the areas where the process works include – stocks, businesses, sales, mergers and acquisitions, and startups.

Sandbagging is one of the most common practices in the corporate world where employees, including managers, pretend to possess and showcase lower capabilities than what they actually have. This, in turn, prepares the business owners, shareholders, and investors to expect less. As a result, they frame strategies keeping that particular success mark in mind. In reality, however, the managers and employees happily put lower effort and accomplish slightly better results than the authorities expect.

This safe game keeps the shareholders satisfied and works for the teams working on certain projects as members become eligible for incentives, rewards, and bonuses for their performance. Above all, the companies become more reputed for achieving more than they aspired to.

The firms successfully implement the sandbagging rules as they effectively control the investor's expectations through analyst reports, media reports, independent analysis, press releases, etc. By lowering the shareholder's expectations, the company creates a safe range for itself. In addition, by lowering expectations, the professionals overperform and gain all shareholders' trust.

It is vital to be aware of the applicability areas to understand the sandbagging definition well:

Stocks

When the shareholders' expectations are met, their level of trust in the company increases. As a result, investors gain confidence and start making investments, which raises the stock prices, indicating the better performance of the business.

As the companies pretend to be less productive than they actually are, they prepare their reports accordingly. When the annual reports of any company mark an above-average growth, shareholders are happy to see results exceeding their expectations. Naturally, this leads to an increase in the share price.

Business

Sandbagging is a very common phenomenon in any business. The businesses never show their real abilities to ensure that the shareholders' expectations align with what the former can easily achieve. Though the process works the best in keeping the companies safe and helping them gain the confidence of the shareholders and investors, there comes a time when the same set of stakeholders start expecting performances beyond what they expect every time.

As a result, there is a time when their expectations are higher than what the companies can achieve. Thus, it is recommended to consider sandbagging to a limit and make sure the shareholders' expectations remain achievable at different times.

Sales

The sales executives handle immense pressure because of the set targets. Therefore, in the sales department, people tend to participate in a rat race to ensure they achieve their targets and become eligible for the daily, weekly, monthly, quarterly, or annual incentives – whichever is applicable. 

For these sales personnel, sandbagging comes out to be the best tool to keep the expectations of the management within limits. With the help of sandbagging in sales, the professionals pretend to be less capable of achieving the set targets, reducing the level of expectations of the managers. As per their assumption of the salespeople's abilities, they prepare themselves for a limited number of targets to be achieved. As a result, when the sales executives' performance goes beyond expectation, their efforts are recognized.

M&A

In a merger and acquisition deal that occurs between the acquired company and the acquiring company, a purchase agreement is prepared that contains a pro-sandbagging term. This sandbagging clause protects the purchaser's interest or the acquiring company. In such an M&A deal, the seller should disclose all accurate information related to the merger or acquisition of the company.

However, the seller sometimes misses disclosing important information to the buyer or voluntarily hides it. Under the sandbagging M&A clause, the purchaser or the acquiring company has the right to recover the potential losses incurred due to the missing information.

Startups

People launch a startup business to make it successful and produce better than expected results for the investors who have shown faith in the business. When the investors trust a new venture, it is obvious for them to expect a good performance in return. After all, the performance in the initial years helps investors decide whether to continue investing in the business and hold the company's stocks or skip it. 

Startups introduce the sandbagging strategy in their setup to gain the trust of the shareholders and keep them happy. They give the earnings updates and estimates below what they hope to achieve in the future. Hence, when the achievement is better, the managers and the company look as if they overperformed and went beyond shareholders' expectations. Once the startups prove their consistency and goodwill in the market, more investors are willing to invest in their shares.

Let us consider the following example to understand how the concept works:

Suppose company ABC Ltd scheduled the release of its analyst report in a few weeks. It decides to use it as a tool to control its shareholders' expectations. The firm asks the in-house analysts to make a forecast stating the company's stable growth in their reports. In contrast, the reality is that the company has been earning profits in double digits over the past year. The report, as a result, keeps the expectations of the shareholders in line with what the company wishes. 

When the company marks a better result than expected, it becomes more reputed in the market.

Undoubtedly, sandbagging can effectively keep companies, managers, and executives in a safe zone. However, using this strategy for a longer span can be difficult.

If companies continue to give lower than expected forecasts about their earnings or revenue, they will appear consistently overperforming. It is likely that the shareholders' expectations will keep rising, making them expect more than what people promise. As a result, shareholders might expect more than what firms can realistically achieve.

Another repercussion of the process could be the complete opposite of the above. In this case, shareholders and investors would keep adjusting their expectations in line with the company's actual performance. As a result, they will ignore the public announcements about the expected or sandbagged earnings and revenue results. In short, the companies will no more be willing to grow or progress.

This article is a Guide to Sandbagging and its meaning. Here we explain how sandbagging works in sales, business, M&A, stocks & startups along with examples. You may learn more about investment banking from the following articles -

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